Nastassia Samal
Microsoft (NASDAQ:MSFT) is likely to get its $69 billion planned purchase of Activision (NASDAQ:ATVI) across the finish line and Broadcom (NASDAQ:AVGO) is also expected to get its $61 billion acquisition of VMware (VMW) done.
While the market is implying a 40% chance that the Activision (ATVI) deal goes through, especially after the Federal Trade Commission sued to block the transaction earlier this month, Westchester Capital’s Roy Behren sees a significantly higher chance of a deal close.
“We would consider this to be mispriced situation, however, there is a long road ahead and things could change,” Behren, Co-President and Co-Chief Investment Officer at Westchester Capital said in an interview with Seeking Alpha earlier this week.
Behren characterized the 2022 year in merger arbitrage as a bit of a letdown, though not due to the decline in M&A volume, but because of some deal terminations, including Dupont’s (DD) decision to abandon its $5.2 billion purchase of Rogers Corp. (ROG) as a China review of the deal went unresolved.
“It was a disappointing year,” Behren said. “Not so much because of the downtick in volume, but because of some unforeseen transaction terminations. A broken deal will generally cost you the proceeds of multiple successfully completed transactions.”
Other deals that Behren believes are being mispriced by the market include Broadcom’s (AVGO) deal to acquire VMware and Amazon’s (AMZN) planned $1.7 billion acquisition of iRobot (NASDAQ:IRBT). He said Wall Street is pricing in a lot lower likelihood that the VMWare deal gets done than he expects.
Wall Street appears to have lots of doubts about Amazon’s purchase of iRobot, as evidenced by trading that indicates a 55% chance of being complete, hurt by privacy and antitrust concerns, including “whacky” theories about the iRobot spying on people in their living room. Behren sees a significantly higher chance the deal gets approved.
“It’s the kind of thing that Amazon needs to demonstrate that they are not going to buy this company and then not allow competitive products to be sold on its platform,” Behren explained.
Amazon has a “bullseye on its back, as does Microsoft, as does Google, all of which are trying to grow both organically and by acquisition,” Behren said. “They have to make sure that they are clear with regulators that they are going to play nice and try not to use unfair competitive advantages to wipe out competitors.”
In what may be a contrarian recommendation to some, Behren said he’s been active in the SPAC market. SPACs, which have been shunned by Wall Street this year due to a myriad of issues, are opportunities for M&A investors. That’s because most SPACS in recent months are liquidating and investors are redeeming their shares for $10. SPACs are currently generating about a 6% return on an annualized basis.
“The risk on these is de minimis if anything at all,” Behren said. “The majority of the time, these days, at least the last couple of months, companies have been in fact liquidating, instead of merging. It’s become a rate of return investment that is fairly competitive with merger arbitrage. It may be a little bit below what you can earn with merger arbitrage, but on a risk-adjusted basis there’s no risk. I’ve never heard of a trust not being available for redeemers when they’ve gone and redeemed.”
Another interesting M&A play is Altaba (AABA), which is the former Yahoo that remained after Verizon acquired most of Yahoo’s internet assets in 2017. Altaba was the entity left that houses a stake in Alibaba (BABA) and it’s been liquidating since 2019. The shares are currently trading at around $3.80, but the trust is expected to complete its liquidation next year at a price of $4.26, according to Behren.
“It’s fallen off the radar because it’s just not as liquid,” Behren said. “From an arbs perspective you own it and you get paid cash when it’s done.”
Some deals that Behren is avoiding include MaxLinear’s (MXL) planned $3.8 billion acquisition of Silicon Motion (SIMO), which the market is currently implying a 25%-30% chance of completion. The transaction needs Chinese antitrust approval, which can be an opaque and lengthy process.
“We are not in the business of investing in coin flips,” Behren said. “We think it’s still more likely that it gets through. This is one I would give you a flashing caution light on.”
Another deal that’s been a hop topic for mergers arb traders is Standard General’s $24 a share planned purchase of Tegna (TGNA), which received some positive news when Standard General last Friday said it waived some contractual rights in the Tegna deal to help appease regulatory concerns
“It’s not a lay up,’ Behren said. “The market appears to be fairly pricing that one.”
Overall Behren said the fund’s performance was decent this year, especially versus the overall market.
“We are going to be up on the year hopefully, but below our typical run rate because of the terminated transactions,” Behren said. “It’s a little bit bitter sweet because we wish were doing a lil bit better for our investors in a market like this.”
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